A Commentary on Changing the Structure of Medicaid


In 1965, Lyndon Johnson signed the bills authorizing both the Medicare and Medicaid programs.  Unlike all the hyped “signings” of executive orders by the current president, Johnson signed real bills passed by both house of Congress that affected millions of Americans.  Johnson (who had headed the Texas National Youth Administration for FDR), in essence, fulfilled much of the promise of Franklin Roosevelt’s New Deal when he signed those bills.

The program reaches deeply into this nation’s vulnerable populations. Medicaid currently covers 20% of all Americans, 30% of adults with disabilities, 76% of poor children, 60 percent of children with disabilities, and 64% of nursing home residents.1 In total, Medicaid paid for care for over 81 million Americans in fiscal 2014.2 That coverage and care is not cheap. Medicaid is now a federal and state program with expenditures in 2015 of $545 billion.3

Roughly 38% of those funds come from state governments and 62% is supplied by the federal government. One continually hears Republicans and some health economists lament the horrible growth of these expenditures and the percentage of state and federal monies that go to Medicaid.

On average, in fiscal 2014 roughly 15% of state government budgets (total Medicaid expenditures minus Federal funds) were used to fund Medicaid.  In terms of the federal outlays, Medicaid accounted for 9.5% of the US government’s budget in fiscal 2015.4

Those figures are interesting, but need to be put in a broader perspective. Total Medicaid expenditures equal almost 18% of total National Health Expenditures and 3% of the Gross Domestic Product.2 So, for just a trifle over 3% of GDP we provide health care for one-fifth of all Americans, including more than half of poor children, children with disabilities, and nursing home residents.

Nonetheless, Republicans in Congress see that as extravagant.  They would cut roughly $800 billion from Medicaid over the next ten years. Just as an aside, they will also reduce taxes by almost a trillion dollar over that same period, with the top one percent of wage earners receiving roughly 40% of those tax reductions.5

They would also dramatically change the way the federal government funds Medicaid.  Currently, state governments have eligibility and payment rules that determine their total Medicare expenditures. The federal government pays a percentage, which varies by state, of whatever those total Medicaid expenditures may be.

Under the proposed Medicaid funding strategy, each state would get a single amount equal to a per capital payment for each person enrolled in Medicaid in that state in 2016.  That total would then increase each year. That rate of increase would most likely be rate for the medical component of the consumer price index.  It would also change for each state as the mix of types of people covered in a state changed and the number of individuals enrolled changes.6 One major problem with this strategy is that it does not consider state-specific changes in program eligibility, changes in payment rates, or changes over time in the level of expenditures per enrollee.7

Probably the most useful evidence on what might occur with the proposed Medicaid funding plan comes from a simulation performed by researchers at The Brookings Institution.6 These three researchers describe their methodology in the following way:

“To gain insight into the likely effects of this change in Medicaid’s financing structure, we examine how state and federal budgets would have been affected if a similar proposal had been implemented in the recent past. In particular, we use state-level data on historical Medicaid spending published by researchers at the Kaiser Family Foundation to examine how states would have fared in 2011 had a cap with the structure specified in the AHCA been implemented in 2004 based on spending levels in 2000. We choose this time period because of the ready availability of suitable data.” (page 1)

Their five basic conclusions from these analyses of the effects of a “Medicaid per capita cap” are:6

  1. Over half of the states would have experienced significant reductions in federal funding for their Medicaid programs.
  2. No states would have received increased funding under this model. The effects would only be neutral or negative.
  3. Those states with the lowest per capita expenditures rates in the base year were more likely to see funding reductions because of their likelihood of higher annual changes in per capita expenditures in later years (i.e., due to regression to the mean).
  4. States risks of incurring significantly larger than expected losses in a federal funding were asymmetric. These risks would vary considerably based on state-specific changes in the demographics of the state population, changes in population health status, public health emergencies (e.g., Zika), and changes in medical practice or technology.
  5. States with higher changes in medical expenditures than the project national change would suffer larger reductions in federal funding, while states with lower than the projected national levels would largely be unaffected by the capping mechanism.

The work by Adler, Fieldler, and Gronniger at Brookings provides considerable assistance in understanding the dynamics of potential federal funding reductions under the basic plans proposed by the House of Representatives’ American Health Care Act and the Senate’s Better Care Reconciliation Act.

A basic mystery lies, however, at the heart of all these discussions. What will states do to compensate for the loss of federal Medicaid funds? The states have two basic options.  First, they can raise taxes to replace those lost federal funds, or they can cut Medicaid expenditures through changes in eligibility, coverage, or payments.

Those states most likely to be hurt under the new system, according to the Brookings work, are those with the lowest per capita Medicaid expenditures.6 Of the ten states with the lowest per capita Medicaid expenditures, only five adopted the Medicaid expansion in which the federal government paid 95% of the costs and the state paid 5% of the bill. Fourteen other states also failed to adopt the expansion.8

One suspects, though it must at this point only be a strong suspicion, that the states legislatures in those 19 states will be less than enthusiastic when asked to assume increased state expenditures for Medicaid under a plan such as those being proposed. They would not accept a 5% increase, and they are likely be faced, under the proposed plans, with demands for larger increases to maintain their Medicaid programs. What that really means is that, at least within these states, one seems more likely to see programmatic changes that remove individuals or providers from the Medicaid rolls to avert increased expenditures, rather than increased state revenue for Medicaid.

Another other hint at what states most likely to be hurt by the change in payment might do can be found by looking at current tax activity in the states.  The three basic sources of tax revenue for states are the sales tax, property taxes, and personal income taxes.9 Looking at the estimated tax burden in the ten states with the lowest per capita Medicaid expenditures and most likely to be affected by a new Medicaid structure may also be instructive.

Six of the ten states most likely to be affected by the change in Medicare payment from the federal government rank in the lowest two-fifths (quintiles) of state tax burden. They ranked between 30th and 45th in state tax burden.10 If one takes a low tax burden as an indicator of a state legislatures aversion to raising taxes, then these six states seem among those states that would be the least willing to raise the tax burden to compensate for lost federal Medicaid funding.  Again, the only alternative would be to reduce Medicaid services.

If the Rs pass a bill that resembles what we see in their current bills, in the 10 states included in this commentary, and probably in many more, Thomas Egan in the NYT sums up the results of such a change.

“Inevitably, with something that deprives upward of 23 million Americans of health care, people will die because of this bill. States will be making life and death decisions as they drop the mandated benefits of Obamacare and cut vital care for the poor, the elderly, the sick and the drug-addicted through Medicaid. The sunset of Obamacare is the dawn of death panels.”11 [emphasis added]



  1. https://www.nytimes.com/2017/06/21/upshot/gop-health-plan-is-really-a-rollback-of-medicaid.html?_r=0
  2. http://www.kff.org/medicaid/state-indicator/distribution-of-medicaid-enrollees-by-enrollment-group/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D
  3. https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet.html
  4. https://www.macpac.gov/wp-content/uploads/2016/06/Trends-in-Medicaid-Spending.pdf
  5. http://www.cnbc.com/2017/06/22/heres-what-didnt-change-in-the-senates-health-care-bill-1-trillion-in-tax-cuts.html
  6. https://www.brookings.edu/wp-content/uploads/2017/05/es_chp_medicaidpercapitacap_adlerfiedlergronniger_51017.pdf
  7. https://www.nytimes.com/interactive/2017/03/07/us/politics/medicaid-reform-impact-on-states.html
  8. http://www.kff.org/health-reform/state-indicator/state-activity-around-expanding-medicaid-under-the-affordable-care-act/?currentTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D
  9. https://taxfoundation.org/sources-state-and-local-tax-revenues/
  10. https://wallethub.com/edu/states-with-highest-lowest-tax-burden/20494/
  11. https://www.nytimes.com/2017/06/23/opinion/our-fake-democracy.html?mcubz=2&_r=0




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